CNY: Casting a wider net over China’s total debt - NAB

Gerard Burg, Senior Economist at NAB, suggests that Chinese debt levels have risen sharply since the Global Financial Crisis, particularly outside the traditional banking system – where the scale of borrowings is frequently under-estimated.

Key Quotes

“Putting a firm figure on China’s total debt levels is far from an easy task – at best we can produce an estimate which has a series of caveats – which reflect the importance (and opacity) of non-traditional financing in China’s economy over the past few years. A starting point is China’s aggregate financing data – which incorporates bank loans, corporate bonds and equity financing with some (but not all) components of the shadow banking sector. This measure was almost 215% of China’s gross domestic product (GDP) in December 2015, but this doesn’t provide a complete picture on the country’s debt – excluding government debt, parts of shadow banking while including equity financing.

Aggregate financing excludes government bonds, which totalled 39% of GDP in December 2015. However, this may not paint a complete picture of government debt, with local government bonds comprising just over 7% of GDP in this measure. The National Audit Office reported that local government debt in China was around 31% of GDP in mid-2013 (the most recent available data), comprising a mix of bank loans, bonds, shadow finance and other sources. Some of these elements may be captured within aggregate financing, but it is impossible to be sure, highlighting the uncertainty around overall debt estimates.

Combining bank loans, shadow banking, government bonds and non-shadow banking aggregate financing provides us with a wider estimate of China’s total debt – which stood at 308% of GDP in December 2015.

Chinese policy makers are facing a significant dilemma regarding the country’s debt. They can no longer afford to allow debt to grow unchecked – as this would increase the likelihood of a major financial crisis and the potential for a hard landing. On the other side, real economic growth is unlikely to be sustainable at the new five year plan target (6.5%) without growth in debt – bringing down the ratio would mean tolerating a considerably lower potential rate for economic growth (something that policy makers are unlikely to tolerate).”
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